Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D. C. 20549
FORM
10-Q
(Mark
One)
of the
Securities Exchange Act of 1934
For the
Quarterly Period Ended October 30, 2009
or
of the
Securities Exchange Act of 1934
For the
Transition Period from ________ to _______.
Commission
file number 000-25225
CRACKER BARREL OLD COUNTRY
STORE, INC.
(Exact
Name of Registrant as
Specified
in Its Charter)
Tennessee
|
62-1749513
|
(State
or Other Jurisdiction
|
(IRS
Employer
|
of
Incorporation or Organization)
|
Identification
No.)
|
305
Hartmann Drive, P. O. Box 787
Lebanon, Tennessee
37088-0787
(Address
of Principal Executive Offices)
(Zip
Code)
615-444-5533
(Registrant’s
Telephone Number, Including Area Code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Yes o No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer |
o
|
Accelerated filer |
x
|
Non-accelerated filer |
o
|
Smaller reporting company |
o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No
x
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date.
22,883,113
Shares of Common Stock
Outstanding
as of November 27, 2009
CRACKER
BARREL OLD COUNTRY STORE, INC.
FORM
10-Q
For
the Quarter Ended October 30, 2009
INDEX
PART
I. FINANCIAL INFORMATION
|
Page
|
||
Item
1
|
|||
· Condensed
Consolidated Financial Statements (Unaudited)
|
|||
a) Condensed
Consolidated Balance Sheet as of October 30, 2009 and July 31,
2009
|
3
|
||
b) Condensed
Consolidated Statement of Income for the Quarters Ended October
30, 2009 and October 31, 2008
|
4
|
||
c) Condensed
Consolidated Statement of Cash Flows for the Three Months Ended October
30, 2009 and October 31, 2008
|
5
|
||
d) Notes
to Condensed Consolidated Financial Statements
|
6
|
||
Item
2
|
|||
· Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
14
|
||
Item
3
|
|||
· Quantitative
and Qualitative Disclosures About Market Risk
|
24
|
||
Item
4
|
|||
· Controls
and Procedures
|
24
|
||
PART
II. OTHER INFORMATION
|
|||
Item
1A
|
|||
· Risk
Factors
|
25
|
||
Item
4
|
|||
· Submission
of Matters to a Vote of Security Holders
|
25
|
||
Item
6
|
|||
· Exhibits
|
26
|
||
SIGNATURES
|
27
|
2
PART
I – FINANCIAL INFORMATION
Item
1. Financial Statements
CRACKER
BARREL OLD COUNTRY STORE, INC.
CONDENSED
CONSOLIDATED BALANCE SHEET
(In
thousands, except share data)
(Unaudited)
October
30,
|
July
31,
|
|||||||
2009
|
2009* | |||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 14,750 | $ | 11,609 | ||||
Accounts
receivable
|
12,985 | 12,730 | ||||||
Income
taxes receivable
|
-- | 4,078 | ||||||
Inventories
|
152,688 | 137,424 | ||||||
Prepaid
expenses and other current assets
|
14,983 | 9,193 | ||||||
Deferred
income taxes
|
26,109 | 23,291 | ||||||
Total
current assets
|
221,515 | 198,325 | ||||||
Property
and equipment
|
1,583,771 | 1,572,438 | ||||||
Less:
Accumulated depreciation and amortization of capital
leases
|
581,946 | 570,662 | ||||||
Property
and equipment – net
|
1,001,825 | 1,001,776 | ||||||
Other
assets
|
46,015 | 45,080 | ||||||
Total
assets
|
$ | 1,269,355 | $ | 1,245,181 | ||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 93,779 | $ | 92,168 | ||||
Current
maturities of long-term debt and other long-term
obligations
|
7,423 | 7,422 | ||||||
Accrued
interest expense
|
10,501 | 10,379 | ||||||
Income
taxes payable
|
2,594 | -- | ||||||
Other
current liabilities
|
152,876 | 154,993 | ||||||
Total
current liabilities
|
267,173 | 264,962 | ||||||
Long-term
debt
|
636,188 | 638,040 | ||||||
Capital
lease obligations
|
54 | 60 | ||||||
Interest
rate swap liability
|
64,684 | 61,232 | ||||||
Other
long-term obligations
|
93,834 | 89,610 | ||||||
Deferred
income taxes
|
54,972 | 55,655 | ||||||
Commitments
and contingencies (Note 14)
|
||||||||
Shareholders’
equity:
|
||||||||
Preferred
stock – 100,000,000 shares of $.01 par
|
||||||||
value
authorized; no shares issued
|
-- | -- | ||||||
Common
stock – 400,000,000 shares of $.01 par value authorized;
|
||||||||
22,811,584
shares issued and outstanding at October 30, 2009,
|
||||||||
and
22,722,685 shares issued and outstanding at July 31, 2009
|
228 | 227 | ||||||
Additional
paid-in capital
|
16,923 | 12,972 | ||||||
Accumulated
other comprehensive loss
|
(45,408 | ) | (44,822 | ) | ||||
Retained
earnings
|
180,707 | 167,245 | ||||||
Total
shareholders’ equity
|
152,450 | 135,622 | ||||||
Total
liabilities and shareholders’ equity
|
$ | 1,269,355 | $ | 1,245,181 |
See notes
to unaudited condensed consolidated financial statements.
* This
condensed consolidated balance sheet has been derived from the audited
consolidated balance sheet as of July 31, 2009, as filed in the Company’s Annual
Report on Form 10-K for the fiscal year ended July 31, 2009.
3
CRACKER
BARREL OLD COUNTRY STORE, INC.
CONDENSED
CONSOLIDATED STATEMENT OF INCOME
(In
thousands, except share data)
(Unaudited)
Quarter
Ended
|
||||||||
October
30,
|
October
31,
|
|||||||
2009
|
2008
|
|||||||
Total
revenue
|
$ | 581,183 | $ | 573,932 | ||||
Cost
of goods sold
|
177,471 | 181,357 | ||||||
Gross
profit
|
403,712 | 392,575 | ||||||
Labor
and other related expenses
|
224,760 | 222,433 | ||||||
Other
store operating expenses
|
105,466 | 105,966 | ||||||
Store
operating income
|
73,486 | 64,176 | ||||||
General
and administrative expenses
|
35,501 | 31,618 | ||||||
Operating
income
|
37,985 | 32,558 | ||||||
Interest
expense
|
11,770 | 14,033 | ||||||
Income
before income taxes
|
26,215 | 18,525 | ||||||
Provision
for income taxes
|
8,191 | 5,693 | ||||||
Net
income
|
$ | 18,024 | $ | 12,832 | ||||
Net
income per share:
|
||||||||
Basic
|
$ | 0.79 | $ | 0.57 | ||||
Diluted
|
$ | 0.78 | $ | 0.57 | ||||
Weighted
average shares:
|
||||||||
Basic
|
22,762,048 | 22,349,967 | ||||||
Diluted
|
23,136,385 | 22,666,326 | ||||||
Dividends
declared per share
|
$ | 0.20 | $ | 0.20 | ||||
See notes
to unaudited condensed consolidated financial statements.
4
CRACKER
BARREL OLD COUNTRY STORE, INC.
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited
and in thousands)
Three
Months Ended
|
||||||||
October
30,
|
October
31,
|
|||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
$ | 18,024 | $ | 12,832 | ||||
Adjustments
to reconcile net income to net cash provided by (used in)
operating
activities
|
||||||||
Depreciation
and amortization
|
14,118 | 14,186 | ||||||
Loss
on disposition of property and equipment
|
945 | 862 | ||||||
Share-based
compensation
|
2,913 | 1,728 | ||||||
Excess
tax benefit from share-based compensation
|
(324 | ) | (7 | ) | ||||
Changes
in assets and liabilities:
|
||||||||
Accounts
receivable
|
(255 | ) | 1,973 | |||||
Income
taxes receivable
|
4,078 | 5,180 | ||||||
Inventories
|
(15,264 | ) | (29,668 | ) | ||||
Prepaid
expenses and other current assets
|
(5,790 | ) | (3,782 | ) | ||||
Accounts
payable
|
1,611 | (8,135 | ) | |||||
Accrued
interest expense
|
122 | 130 | ||||||
Income
taxes payable
|
2,918 | -- | ||||||
Other
current liabilities
|
(2,052 | ) | (3,545 | ) | ||||
Deferred
income taxes
|
(635 | ) | (750 | ) | ||||
Other
long-term assets and liabilities
|
2,998 | 2,290 | ||||||
Net
cash provided by (used in) operating activities
|
23,407 | (6,706 | ) | |||||
Cash
flows from investing activities:
|
||||||||
Purchase
of property and equipment
|
(14,904 | ) | (22,003 | ) | ||||
Proceeds
from sale of property and equipment
|
50 | 728 | ||||||
Proceeds
from insurance recoveries of property and equipment
|
33 | 28 | ||||||
Net
cash used in investing activities
|
(14,821 | ) | (21,247 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from issuance of long-term debt
|
158,000 | 288,200 | ||||||
Principal
payments under long-term debt and other long-term
obligations
|
(159,857 | ) | (257,871 | ) | ||||
Proceeds
from exercise of share-based compensation awards
|
715 | 870 | ||||||
Excess
tax benefit from share-based compensation
|
324 | 7 | ||||||
Dividends
on common stock
|
(4,627 | ) | (4,057 | ) | ||||
Net
cash (used in) provided by financing activities
|
(5,445 | ) | 27,149 | |||||
Net
increase (decrease) in cash and cash equivalents
|
3,141 | (804 | ) | |||||
Cash
and cash equivalents, beginning of period
|
11,609 | 11,978 | ||||||
Cash
and cash equivalents, end of period
|
$ | 14,750 | $ | 11,174 | ||||
Supplemental
disclosures of cash flow information:
|
||||||||
Cash
paid during the three months for:
|
||||||||
Interest,
excluding interest rate swap payments, net of amounts
capitalized
|
$ | 4,212 | $ | 8,879 | ||||
Interest
rate swap
|
$ | 6,831 | $ | 4,352 | ||||
Income
taxes
|
$ | 625 | $ | 93 | ||||
Supplemental
schedule of non-cash financing activity:
|
||||||||
Change
in fair value of interest rate swap
|
$ | (3,452 | ) | $ | (1,820 | ) | ||
Change
in deferred tax asset for interest rate swap
|
$ | 2,866 | $ | 259 |
See notes to unaudited condensed
consolidated financial statements.
5
CRACKER BARREL OLD COUNTRY
STORE, INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except percentages and share data)
(Unaudited)
1.
|
Condensed Consolidated
Financial Statements
|
The
condensed consolidated balance sheets at October 30, 2009 and July 31, 2009 and
the related condensed consolidated statements of income and cash flows for the
quarters ended October 30, 2009 and October 31, 2008, have been prepared by
Cracker Barrel Old Country Store, Inc. (the “Company”) in accordance with
accounting principles generally accepted in the United States of America
(“GAAP”) and pursuant to the rules and regulations of the Securities and
Exchange Commission (“SEC”) without audit. The Company is principally
engaged in the operation and development of the Cracker Barrel Old Country
Store®
(“Cracker Barrel”) restaurant and retail concept. In the opinion of
management, all adjustments (consisting of normal and recurring items) necessary
for a fair presentation of such condensed consolidated financial statements have
been made. The results of operations for any interim period are not
necessarily indicative of results for a full year.
These
condensed consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K for the year ended July 31, 2009 (the “2009
Form 10-K”). References in these Notes to Condensed Consolidated
Financial Statements to a year are to the Company’s fiscal year unless otherwise
noted.
2.
|
Summary of Significant
Accounting Policies
|
The
significant accounting policies of the Company are included in the 2009 Form
10-K. During the quarter ended October 30, 2009, there were no
significant changes to those accounting policies. Management has
evaluated subsequent events through December 8, 2009, which is the date the
financial statements were issued.
3.
|
Recent Accounting
Pronouncements
|
Accounting
Standards Codification
On
September 15, 2009, the Company adopted the Accounting Standards Codification
(“ASC”) as issued by the Financial Accounting Standards Board
(“FASB”). The ASC is the single source of authoritative
nongovernmental GAAP, except for rules and interpretive releases of the SEC,
which are sources of authoritative GAAP for SEC registrants. The
adoption did not have an impact on the Company’s consolidated financial
statements.
Fair
Value
On August
1, 2009, the first day of 2010, the Company adopted, on a prospective basis,
accounting guidance as issued by the FASB for certain nonfinancial assets and
liabilities that are recorded or disclosed at fair value on a nonrecurring
basis, such as nonfinancial long-lived asset groups measured at fair value for
an impairment assessment. The adoption did not have an impact on the
Company’s consolidated financial statements.
6
4.
|
Fair Value
Measurements
|
The
Company’s assets and liabilities measured at fair value on a recurring basis at
October 30, 2009 were as follows:
Quoted
Prices
in
Active
Markets
for
Identical
Assets
(Level
1)
|
Significant
Other
Observable
Inputs
(Level
2)
|
Significant
Unobservable
Inputs
(Level
3)
|
Fair
Value as
of
October 30,
2009
|
|||||||||||||
Cash
equivalents*
|
$ | 3,248 | $ | -- | $ | -- | $ | 3,248 | ||||||||
Deferred
compensation plan assets**
|
23,785 | -- | -- | 23,785 | ||||||||||||
Total
assets at fair value
|
$ | 27,033 | $ | -- | $ | -- | $ | 27,033 | ||||||||
Interest
rate swap liability (Note 7)
|
$ | -- | $ | 64,684 | $ | -- | $ | 64,684 | ||||||||
Total
liabilities at fair value
|
$ | -- | $ | 64,684 | $ | -- | $ | 64,684 |
The
Company’s assets and liabilities measured at fair value on a recurring basis at
July 31, 2009 were as follows:
Quoted
Prices
in
Active
Markets
for
Identical
Assets
(Level
1)
|
Significant
Other
Observable
Inputs
(Level
2)
|
Significant
Unobservable
Inputs
(Level
3)
|
Fair
Value as
of
July 31,
2009
|
|||||||||||||
Cash
equivalents*
|
$ | 48 | $ | -- | $ | -- | $ | 48 | ||||||||
Deferred
compensation plan assets**
|
22,583 | -- | -- | 22,583 | ||||||||||||
Total
assets at fair value
|
$ | 22,631 | $ | -- | $ | -- | $ | 22,631 | ||||||||
Interest
rate swap liability (Note 7)
|
$ | -- | $ | 61,232 | $ | -- | $ | 61,232 | ||||||||
Total
liabilities at fair value
|
$ | -- | $ | 61,232 | $ | -- | $ | 61,232 |
*Consists
of money market fund investments.
**Represents
plan assets invested in mutual funds established under a Rabbi Trust for the
Company’s non-qualified savings plan and is included in the condensed
consolidated balance sheet as other assets.
The
Company’s money market fund investments and deferred compensation plan assets
are measured at fair value using quoted market prices. The fair value
of the Company’s interest rate swap liability is determined based on the present
value of expected future cash flows. Since the interest rate swap is
based on the LIBOR forward curve, which is observable at commonly quoted
intervals for the full term of the swap, it is considered a Level 2
input. Nonperformance risk is reflected in determining the interest
rate swap’s fair value by using the Company’s credit spread less the risk-free
interest rate, both of which are observable at commonly quoted intervals for the
swap’s term. Thus, the adjustment for nonperformance risk is also
considered as a Level 2 input.
The fair
values of the Company’s accounts receivable and accounts payable approximate
their carrying amounts due to their short duration. The fair value of the
Company’s variable-rate term loans and revolving credit facility, based on
quoted market prices, totaled approximately $615,034 and $619,200 at October 30,
2009 and July 31, 2009, respectively. See Note 6 for additional
information on the Company’s debt.
7
5.
|
Inventories
|
Inventories
were comprised of the following at:
October
30,
|
July
31,
|
|||||||
2009
|
2009
|
|||||||
Retail
|
$ | 120,292 | $ | 108,412 | ||||
Restaurant
|
19,539 | 16,782 | ||||||
Supplies
|
12,857 | 12,230 | ||||||
Total
|
$ | 152,688 | $ | 137,424 |
6.
|
Debt
|
Long-term
debt consisted of the following at:
October
30,
2009
|
July
31,
2009
|
|||||||
Term
Loans
|
$ | 643,173 | $ | 645,000 | ||||
Revolving
Credit Facility
|
-- | -- | ||||||
Note
payable
|
420 | 444 | ||||||
643,593 | 645,444 | |||||||
Current
maturities
|
(7,405 | ) | (7,404 | ) | ||||
Long-term
debt
|
$ | 636,188 | $ | 638,040 |
At
October 30, 2009, the Company’s credit facility (the “Credit Facility”)
consisted of term loans with a scheduled maturity date of April 27, 2013 and a
$250,000 revolving credit facility expiring April 27, 2011 (the “Revolving
Credit Facility”). At October 30, 2009, $600,000 of the Company’s
term loans was swapped at 7.07% and the weighted average interest rate on the
remaining $43,173 was 1.75%. At October 30, 2009, the Company had
outstanding $34,576 of standby letters of credit, which reduce the Company’s
availability under the Revolving Credit Facility (see Note 14). At
October 30, 2009, the Company had $215,424 available under the Revolving Credit
Facility. On November 6, 2009, the Company entered into an amendment
to the Credit Facility which extended the maturities of portions of the term
loans and the availability of the Revolving Credit Facility (see Note
15).
The
Credit Facility contains customary financial covenants, which are specified in
the agreement and include maintenance of a maximum consolidated total leverage
ratio and a minimum consolidated interest coverage ratio. At October
30, 2009, the Company was in compliance with all debt covenants.
The
Credit Facility also imposes restrictions on the amount of dividends the Company
is able to pay. If there is no default then existing and there is at
least $100,000 then available under the Revolving Credit Facility, the Company
may both: (1) pay cash dividends on its common stock if the aggregate amount of
dividends paid in any fiscal year is less than 15% of Consolidated EBITDA from
continuing operations (as defined in the Credit Facility) during the immediately
preceding fiscal year; and (2) in any event, increase its regular quarterly cash
dividend in any quarter by an amount not to exceed the greater of $.01 or 10% of
the amount of the dividend paid in the prior fiscal quarter.
8
The note
payable consists of a five-year note with a vendor in the original principal
amount of $507 and represents the financing of prepaid maintenance for
telecommunications equipment. The note payable is payable in monthly
installments of principal and interest of $9 through October 16, 2013 and bears
interest at 2.88%.
7.
|
Derivative
Instruments and Hedging
Activities
|
The
Company uses derivative instruments to mitigate its interest rate
risk. The Company does not hold or use derivative instruments for
trading purposes. The Company also does not have any derivatives not
designated as hedging instruments and has not designated any non-derivatives as
hedging instruments.
The
Company has interest rate risk relative to its outstanding borrowings under its
Credit Facility (see Note 6). Loans under the Credit Facility bear
interest, at the Company’s election, either at the prime rate or LIBOR plus a
percentage point spread based on certain specified financial
ratios.
The
Company’s policy has been to manage interest cost using a mix of fixed and
variable rate debt (see Note 6). To manage this risk, the Company
entered into an interest rate swap on May 4, 2006 in which it agreed to exchange
with a counterparty, at specified intervals effective August 3, 2006, the
difference between fixed and variable interest amounts calculated by reference
to an agreed-upon notional principal amount. The interest rate swap
was accounted for as a cash flow hedge. The swapped portion of the
Company’s outstanding debt is fixed at a rate of 5.57% plus the Company’s credit
spread, or 7.07% based on the Company’s credit spread at October 30, 2009, over
the 7-year life of the interest rate swap.
The
swapped portion of the outstanding debt or notional amount of the interest rate
swap over its remaining life is as follows:
From
May 5, 2009 to May 3, 2010
|
$600,000
|
From
May 4, 2010 to May 2, 2011
|
575,000
|
From
May 3, 2011 to May 2, 2012
|
550,000
|
From
May 3, 2012 to May 3, 2013
|
525,000
|
At
October 30, 2009 and July 31, 2009, the estimated fair values of the Company’s
derivative instrument were as follows:
Balance
Sheet Location
|
October
30, 2009
|
July
31, 2009
|
|||
Interest
rate swap (See Note 4)
|
Interest
rate swap liability
|
$ 64,684
|
$ 61,232
|
The
estimated fair value of the Company’s interest rate swap liability incorporates
the Company’s own non-performance risk (see Note 4). The adjustment
related to non-performance risk at October 30, 2009 and July 31, 2009 resulted
in a reduction of $4,244 and $5,372, respectively, in the fair value of the
interest rate swap liability. The offset to the interest rate swap
liability is recorded in accumulated other comprehensive loss (“AOCL”), net of
the deferred tax asset, and will be reclassified into earnings over the term of
the underlying debt. As of October 30, 2009, the estimated pre-tax
portion of AOCL that is expected to be reclassified into earnings over the next
twelve months is $29,684. Cash flows related to the interest rate
swap are included in interest expense and in operating activities.
9
The
following table summarizes the pre-tax effects of the Company’s derivative
instrument on AOCL for the quarter ended October 30, 2009 and the year
ended July 31, 2009:
Amount
of Loss Recognized in
AOCL
on Derivative (Effective
Portion)
|
|||
Quarter
Ended
October
30,
2009
|
Year
Ended
July
31,
2009
|
||
Cash
flow hedge:
|
|||
Interest
rate swap
|
$ (3,452)
|
$
(21,614)
|
The
following table summarizes the pre-tax effects of the Company’s derivative
instrument on income for the quarters ended October 30, 2009 and October 31,
2008:
Location
of Loss
Reclassified
from
AOCL
into Income
(Effective
Portion)
|
Amount
of Loss Reclassified from
AOCL
into Income
(Effective
Portion)
|
|||
Quarter
Ended
|
Quarter
Ended
|
|||
October
30,
2009
|
October
31,
2008
|
|||
Cash
flow hedge:
|
||||
Interest
rate swap
|
Interest
expense
|
$
6,831
|
$
4,352
|
No
ineffectiveness has been recorded in the quarters ended October 30, 2009
and October 31, 2008.
|
8.
|
Shareholders’
Equity
|
During
the quarter ended October 30, 2009, the Company received proceeds of $715 from
the exercise of share-based compensation awards and the corresponding issuance
of 88,899 shares of its common stock. During the quarter ended
October 30, 2009, the Company did not make any share repurchases.
During
the quarter ended October 30, 2009, the Company paid dividends of $0.20 per
common share. During the first quarter of 2010, the Company also
declared an additional dividend of $0.20 per common share that was paid on
November 5, 2009 and is recorded in other current liabilities in the
accompanying condensed consolidated balance sheet. On December 2,
2009, the Company’s Board of Directors declared a regular dividend of $0.20 per
share payable on February 5, 2010 to shareholders of record on January 15,
2010.
During
the quarter ended October 30, 2009, the unrealized loss, net of tax, on the
Company’s interest rate swap increased by $586 to $45,408 and is recorded in
AOCL (see Notes 4, 7 and 9).
During
the quarter ended October 30, 2009, total share-based compensation was
$2,913. During the quarter ended October 30, 2009, the excess tax
benefit realized upon exercise of share-based compensation awards was
$324.
10
9.
|
Comprehensive
Income
|
Comprehensive
income consisted of the following at:
Quarter
Ended
|
||||||||
October
30,
2009
|
October
31,
2008
|
|||||||
Net
income
|
$ | 18,024 | $ | 12,832 | ||||
Other
comprehensive income:
|
||||||||
Change
in fair value of interest rate swap, net of
tax
benefit of $2,866 and $259, respectively
|
(586 | ) | (1,561 | ) | ||||
Total
comprehensive income
|
$ | 17,438 | $ | 11,271 |
10.
|
Seasonality
|
Historically,
the net income of the Company has been lower in the first three quarters and
highest in the fourth quarter, which includes much of the summer vacation and
travel season. Management attributes these variations to the decrease
in interstate tourist traffic and propensity to dine out less during the regular
school year and winter months and the increase in interstate tourist traffic and
propensity to dine out more during the summer months. The Company's
retail sales historically have been highest in the Company's second quarter,
which includes the Christmas holiday shopping season. The Company
also generally opens additional new locations throughout the
year. Therefore, the results of operations for any interim period
cannot be considered indicative of the operating results for an entire
year.
11.
|
Segment
Reporting
|
Cracker
Barrel units represent a single, integrated operation with two related and
substantially integrated product lines. The operating expenses of the
restaurant and retail product line of a Cracker Barrel unit are shared and are
indistinguishable in many respects. Accordingly, the Company manages
its business on the basis of one reportable operating segment. All of
the Company’s operations are located within the United States. Total
revenue was comprised of the following at:
Quarter
Ended
|
||||||||
October
30,
2009
|
October
31,
2008
|
|||||||
Revenue:
|
||||||||
Restaurant
|
$ | 466,832 | $ | 455,967 | ||||
Retail
|
114,351 | 117,965 | ||||||
Total
revenue
|
$ | 581,183 | $ | 573,932 |
12. Shared-Based
Compensation
Share-based
compensation expense is measured at the grant date based on the fair value of
the award and is recognized as expense over the requisite service
period. Share-based compensation expense is recorded in general and
administrative expenses. For the quarters ended October 30, 2009 and
October 31, 2008, share-based compensation expense totaled $922 and $1,027,
respectively, for stock options and $1,991 and $701, respectively, for nonvested
stock.
11
13. Net Income Per Share and
Weighted Average Shares
Basic
consolidated net income per share is computed by dividing consolidated net
income available to common shareholders by the weighted average number of common
shares outstanding for the reporting period. Diluted consolidated net
income per share reflects the potential dilution that could occur if securities,
options or other contracts to issue common stock were exercised or converted
into common stock and is based upon the weighted average number of common and
common equivalent shares outstanding during the reporting
period. Common equivalent shares related to stock options and
nonvested stock and stock awards issued by the Company are calculated using the
treasury stock method. The Company’s outstanding stock options and
nonvested stock and stock awards represent the only dilutive effects on diluted
consolidated net income per share.
The
following table reconciles the components of the diluted earnings per share
computations:
Quarter
Ended
|
||||||||
October
30,
|
October
31,
|
|||||||
2009
|
2008
|
|||||||
Net
income per share numerator
|
$ | 18,024 | $ | 12,832 | ||||
Net
income per share denominator:
|
||||||||
Weighted
average shares
|
22,762,048 | 22,349,967 | ||||||
Add
potential dilution:
|
||||||||
Stock
options and nonvested stock and stock awards
|
374,337 | 316,359 | ||||||
Diluted
weighted average shares
|
23,136,385 | 22,666,326 |
14.
|
Commitments and
Contingencies
|
The
Company and its subsidiaries are parties to various legal and regulatory
proceedings and claims incidental to and arising out of the ordinary course of
its business. In the opinion of management, based upon information
currently available, the ultimate liability with respect to these proceedings
and claims will not materially affect the Company’s consolidated results of
operations or financial position.
The
Company is contingently liable pursuant to standby letters of credit as credit
guarantees related to insurers. At October 30, 2009, the Company had
$34,576 of standby letters of credit related to securing reserved claims under
workers' compensation insurance. All standby letters of credit are
renewable annually and reduce the Company’s availability under its Revolving
Credit Facility (see Note 6 for further information on the Company’s Revolving
Credit Facility).
The
Company is secondarily liable for lease payments under the terms of an operating
lease that has been assigned to a third party. At October 30, 2009,
the lease has a remaining life of approximately 3.9 years with annual lease
payments of approximately $361 for a total guarantee of $1,412. The
Company’s performance is required only if the assignee fails to perform its
obligations as lessee. At this time, the Company has no reason to
believe that the assignee will not perform, and, therefore, no provision has
been made in the accompanying condensed consolidated balance sheet for amounts
to be paid in case of non-performance by the assignee.
12
Upon the
sale of Logan’s Roadhouse, Inc. (“Logan’s”) in 2007, the Company reaffirmed its
guarantee on the lease payments for two Logan’s restaurants. At
October 30, 2009, the operating leases have remaining lives of 2.2 and 10.4
years with annual payments of approximately $94 and $103, respectively, for a
total guarantee of $1,370. The Company’s performance is required only
if Logan’s fails to perform its obligations as lessee. At this time,
the Company has no reason to believe Logan’s will not perform, and therefore, no
provision has been made in the condensed consolidated balance sheet for amounts
to be paid as a result of non-performance by Logan’s.
The
Company enters into certain indemnification agreements in favor of third parties
in the ordinary course of business. The Company believes that the
probability of incurring an actual liability under such indemnification
agreements is sufficiently remote so that no liability has been
recorded. In connection with the divestiture of Logan’s and Logan’s
sale-leaseback transaction (see Note 16 to the Company’s Consolidated Financial
Statements included in the 2009 Form 10-K), the Company entered into various
agreements to indemnify third parties against certain tax obligations, for any
breaches of representations and warranties in the applicable transaction
documents and for certain costs and expenses that may arise out of specified
real estate matters, including potential relocation and legal
costs. With the exception of certain tax indemnifications, the
Company believes that the probability of being required to make any
indemnification payments to Logan’s is remote. Therefore, at October
30, 2009, the Company has recorded a liability of $72 in the condensed
consolidated balance sheet for these potential tax indemnifications, but no
provision has been recorded for potential non-tax indemnifications.
15.
|
Subsequent
Event
|
On
November 6, 2009, the Company entered into an amendment to the Credit
Facility. The amendment extended the availability of $165,000 of the
$250,000 Revolving Credit Facility to January 27, 2013 from April 27,
2011. The amendment also extended the maturity date of $250,000 of
the Company’s term loans to April 27, 2016 from April 27,
2013. Borrowings under the Credit Facility bear interest, at the
Company’s election, either at the prime rate or LIBOR plus a credit
spread. The Company’s credit spreads to LIBOR on the term loans are
1.50% and 2.50% on the non-extended and extended term loans,
respectively. The Revolving Credit Facility credit spread is
determined by reference to the Company’s consolidated total leverage ratio as
defined in the Credit Facility. Currently, the Company’s credit
spreads to LIBOR are 1.50% and 2.50% on the non-extended portion and the
extended portion, respectively, of the Revolving Credit Facility, while the
Company’s credit spreads to the prime rate are 0.50% and 1.50% on the
non-extended portion and the extended portion, respectively, of the Revolving
Credit Facility. Subsequent to the filing of the Company’s Quarterly
Report on Form 10-Q on December 8, 2009, based upon the Company’s consolidated
total leverage ratio at October 30, 2009, the Company’s Revolving Credit
Facility credit spreads to LIBOR will be reduced to 1.25% and 2.25% on the
non-extended portion and the extended portion, respectively, of the Revolving
Credit Facility. At that time, the Company’s credit spreads to the
prime rate also will be reduced to 0.25% and 1.25% on the non-extended portion
and the extended portion, respectively, of the Revolving Credit
Facility.
13
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations
Cracker
Barrel Old Country Store, Inc. and its subsidiaries (collectively, the
“Company,” “our” or “we”) are principally engaged in the operation and
development in the United States of the Cracker Barrel Old Country Store® (“Cracker
Barrel”) restaurant and retail concept. At October 30, 2009, we
operated 591 Cracker Barrel units in 41 states. All dollar amounts
reported or discussed in this Management’s Discussion and Analysis of Financial
Condition and Results of Operations (“MD&A”) are shown in thousands, except
per share amounts and certain statistical information (e.g., number of
stores). References to years in MD&A are to our fiscal year
unless otherwise noted.
MD&A
provides information which management believes is relevant to an assessment and
understanding of our consolidated results of operations and financial
condition. MD&A should be read in conjunction with the (i)
condensed consolidated financial statements and notes thereto in this Quarterly
Report on Form 10-Q and (ii) financial statements and the notes thereto included
in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31,
2009 (the “2009 Form 10-K”). Except for specific historical
information, many of the matters discussed in this report may express or imply
projections of revenues or expenditures, plans and objectives for future
operations, growth or initiatives, expected future economic performance, or the
expected outcome or impact of pending or threatened litigation. These
and similar statements regarding events or results which we expect will or may
occur in the future, are forward-looking statements that involve risks,
uncertainties and other factors which may cause our actual results and
performance to differ materially from those expressed or implied by those
statements. All forward-looking information is provided pursuant to
the safe harbor established under the Private Securities Litigation Reform Act
of 1995 and should be evaluated in the context of these risks, uncertainties and
other factors. Forward-looking statements generally can be identified
by the use of forward-looking terminology such as “trends,” “assumptions,”
“target,” “guidance,” “outlook,” “opportunity,” “future,” “plans,” “goals,”
“objectives,” “expectations,” “near-term,” “long-term,”
“projection,” “may,” “will,” “would,” “could,” “expect,” “intend,” “estimate,”
“anticipate,” “believe,” “potential,” “regular,” “should,” “projects,”
“forecasts” or “continue” (or the negative or other derivatives of
each of these terms) or similar terminology.
We
believe the assumptions underlying any forward-looking statements are
reasonable; however, any of the assumptions could be inaccurate, and therefore,
actual results may differ materially from those projected in or implied by the
forward-looking statements. Factors and risks that may result in
actual results differing from this forward-looking information include, but are
not limited to, those contained in Part I, Item 1A of the 2009 Form 10-K, which
is incorporated herein by this reference, as well as other factors discussed
throughout this report, including, without limitation, the factors described
under “Critical Accounting Estimates” on pages 20-24 of this Form 10-Q or, from
time to time, in our filings with the Securities and Exchange Commission
(“SEC”), press releases and other communications.
Readers
are cautioned not to place undue reliance on forward-looking statements made in
this report, since the statements speak only as of the report’s
date. Except as may be required by law, we have no obligation, and do
not intend, to publicly update or revise any of these forward-looking statements
to reflect events or circumstances occurring after the date of this report or to
reflect the occurrence of unanticipated events. Readers are advised,
however, to consult any future public disclosures that we may make on related
subjects in reports that we file with or furnish to the SEC or in our other
public disclosures.
14
Results
of Operations
The
following table highlights operating results by percentage relationships to
total revenue for the quarter ended October 30, 2009 as compared to the same
period in the prior year:
Quarter
Ended
|
||||||||
October
30,
|
October
31,
|
|||||||
2009
|
2008
|
|||||||
Total
revenue
|
100.0 | % | 100.0 | % | ||||
Cost
of goods sold
|
30.5 | 31.6 | ||||||
Gross
profit
|
69.5 | 68.4 | ||||||
Labor
and other related expenses
|
38.7 | 38.7 | ||||||
Other
store operating expenses
|
18.2 | 18.5 | ||||||
Store
operating income
|
12.6 | 11.2 | ||||||
General
and administrative expenses
|
6.1 | 5.5 | ||||||
Operating
income
|
6.5 | 5.7 | ||||||
Interest
expense
|
2.0 | 2.5 | ||||||
Income
before income taxes
|
4.5 | 3.2 | ||||||
Provision
for income taxes
|
1.4 | 1.0 | ||||||
Net
income
|
3.1 | % | 2.2 | % |
The
following table highlights the components of total revenue by percentage
relationships to total revenue for the quarter ended October 30, 2009 as
compared to the same period in the prior year:
Quarter
Ended
|
||||||||
October
30,
|
October
31,
|
|||||||
2009
|
2008
|
|||||||
Revenue:
|
||||||||
Restaurant
|
80.3 | % | 79.4 | % | ||||
Retail
|
19.7 | 20.6 | ||||||
Total
revenue
|
100.0 | % | 100.0 | % |
The
following table sets forth the number of units in operation at the beginning and
end of the quarters ended October 30, 2009 and October 31, 2008,
respectively:
Quarter
Ended
|
|||
October
30,
|
October
31,
|
||
2009
|
2008
|
||
Open
at beginning of period
|
588
|
577
|
|
Opened
during period
|
3
|
4
|
|
Open
at end of period
|
591
|
581
|
15
Average
unit volumes include sales of all stores. The following table
highlights average unit volumes for the quarter ended October 30, 2009 as
compared to the same period in the prior year:
Quarter
Ended
|
||||||||
October
30,
|
October
31,
|
|||||||
2009
|
2008
|
|||||||
Revenue:
|
||||||||
Restaurant
|
$ | 791.8 | $ | 788.8 | ||||
Retail
|
193.9 | 204.0 | ||||||
Total
revenue
|
$ | 985.7 | $ | 992.8 |
Total
Revenue
Total
revenue for the first quarter of 2010 increased 1.3% compared to the prior year
first quarter. For the quarter, comparable store restaurant sales
increased 0.6% and comparable store retail sales decreased 4.8% resulting in a
combined comparable store sales (total revenue) decrease of 0.5%. The
comparable store restaurant sales increase consisted of a 2.0% average check
increase for the quarter (including a 2.7% average menu price increase) and a
1.4% guest traffic decrease. The comparable store retail sales
decrease was due to the decline in guest traffic and lower guest spending on
retail products. We continue to experience the effects of pressures
on consumer discretionary income in our guest traffic and
sales. Sales from newly opened stores accounted for the total revenue
increase in the first quarter.
Gross
Profit
Gross
profit as a percentage of total revenue for the first quarter of 2010 increased
to 69.5% compared to 68.4% in the first quarter of the prior
year. The increase was due to our menu price increase referenced
above and commodity deflation of 2.1%.
Labor
and Other Related Expenses
Labor and
other related expenses include all direct and indirect labor and related costs
incurred in store operations. Labor and other related expenses as a
percentage of total revenue remained flat compared to the first quarter of the
prior year at 38.7%.
Other
Store Operating Expenses
Other
store operating expenses include all unit-level operating costs, the major
components of which are utilities, operating supplies, repairs and maintenance,
depreciation and amortization, advertising, rent, credit card fees and
non-labor-related pre-opening expenses. Other store operating
expenses as a percentage of total revenue decreased to 18.2% in the first
quarter this year compared to 18.5% in the first quarter of the prior
year. Lower utilities, supplies and store miscellaneous expenses,
which each accounted for a 0.2% reduction in other store operating expenses,
were partially offset by an increase of 0.3% in rent expense. Lower
utilities expense resulted from deflation in the costs of electricity and
natural gas. Lower store miscellaneous expense resulted from lower hourly
employee turnover and cost control initiatives. The decrease in
supplies was also due to cost control initiatives. The increase in rent expense
was due to the sale-leaseback transactions we completed in the fourth quarter of
2009 (see Note 9 to our Consolidated Financial Statements contained in the 2009
Form 10-K for additional information).
16
General
and Administrative Expenses
General
and administrative expenses as a percentage of total revenue increased to 6.1%
in the first quarter of 2010 as compared to 5.5% in the first quarter of last
year. The increase was due to higher incentive compensation accruals,
including share-based compensation, which reflected better performance against
financial objectives in the first quarter of 2010 versus the same period a year
ago.
Interest
Expense
Interest
expense as a percentage of total revenue decreased to 2.0% in the first quarter
of 2010 as compared to 2.5% in the first quarter of last year primarily due to
lower average debt outstanding.
Provision
for Income Taxes
The
provision for income taxes as a percent of pre-tax income was 31.2% in the first
quarter of 2010 as compared to 30.7% in the first quarter of
2009. The increase in the effective tax rate from the first quarter
of 2009 to the first quarter of 2010 reflected lower employer tax credits as a
percent of pre-tax income due to the increase in pre-tax income.
Liquidity and Capital
Resources
Our
primary sources of liquidity are cash generated from our operations and our
borrowing capacity under our $250,000 revolving credit facility (the “Revolving
Credit Facility”). Our internally generated cash, along with cash on
hand at July 31, 2009, our borrowings under our Revolving Credit Facility and
proceeds from exercises of share-based compensation awards were sufficient to
finance all of our growth, dividend payments, working capital needs and other
cash payment obligations in the first quarter of 2010.
We
believe that cash at October 30, 2009, along with cash generated from our
operating activities, the borrowing capacity under our Revolving Credit Facility
and proceeds from exercises of share-based compensation awards will be
sufficient to finance our continued operations, our continued expansion plans,
our principal payments on our debt and our dividend payments for at least the
next twelve months and thereafter for the foreseeable future. See
“Borrowing Capacity and Debt Covenants” section below regarding our amendment to
extend $165,000 of our Revolving Credit Facility availability to January 27,
2013.
Cash
Generated From Operations
Our
operating activities provided net cash of $23,407 for the quarter ended October
30, 2009, which represented an increase from the $6,706 net cash used during the
same period a year ago. This increase reflected the change in retail
inventories, the timing of payments for accounts payable and higher net
income.
Borrowing
Capacity and Debt Covenants
On
November 6, 2009, we entered into an amendment to our $1,250,000 credit facility
(the “Credit Facility”), which consists of term loans (aggregate outstanding at
October 30, 2009 was $643,173) and the Revolving Credit Facility. The
amendment extended the maturity date of $250,000 of our term loans to April 27,
2016 from April 27, 2013. The amendment also extended the
availability of $165,000 of the Revolving Credit Facility to January 27, 2013
from April 27, 2011. At October 30, 2009, although we did not have
any outstanding borrowings under the Revolving Credit Facility, we had $34,576
of standby letters of credit related to securing reserved claims under workers'
compensation insurance which reduce our availability under the Revolving Credit
Facility. At October 30, 2009, we had $215,424 in borrowing capacity
under our Revolving Credit Facility. See Notes 6 and 15 to our
Condensed Consolidated Financial Statements for further information on our
long-term debt.
17
The
Credit Facility contains customary financial covenants, which include a
requirement that we maintain a maximum consolidated total leverage ratio (ratio
of total indebtedness to EBITDA, which is defined as earnings before interest,
taxes, depreciation and amortization) of 3.75 at October 30, 2009 and throughout
the remaining term of the Credit Facility. The Credit Facility’s
financial covenants also require that we maintain a minimum consolidated
interest coverage ratio (ratio of earnings before interest, taxes, depreciation
and amortization to cash interest payable, as defined) of 3.75 at October 30,
2009. The minimum consolidated interest coverage ratio increases to
4.00 for the fourth quarter of 2010 and for the remaining term of the Credit
Facility.
At
October 30, 2009, our consolidated total leverage ratio and consolidated
interest coverage ratio were 2.92 and 8.56, respectively. We
presently expect to remain in compliance with the Credit Facility’s financial
covenants for the remaining term of the facility.
Share
Repurchases, Dividends and Proceeds from the Exercise of Share-Based
Compensation Awards
We have
been authorized to repurchase shares during 2010 to offset share dilution that
might result from employee option exercises or employee share
issuance. The principal criteria for share repurchases are that they
be accretive to expected net income per share, are within the limits imposed by
our Credit Facility and that they be made only from free cash flow (operating
cash flow less capital expenditures and dividends) rather than
borrowings. During the quarter ended October 30, 2009, we did not
make any share repurchases. In the second quarter of 2010, we expect
to repurchase shares from free cash flow to offset share dilution.
Our
Credit Facility imposes restrictions on the amount of dividends we are able to
pay. If there is no default then existing and there is at least
$100,000 then available under our Revolving Credit Facility, we may both: (1)
pay cash dividends on our common stock if the aggregate amount of such dividends
paid during any fiscal year is less than 15% of Consolidated EBITDA from
continuing operations (as defined in the Credit Facility) during the immediately
preceding fiscal year; and (2) in any event, increase our regular quarterly cash
dividend in any quarter by an amount not to exceed the greater of $.01 or 10% of
the amount of the dividend paid in the prior fiscal quarter.
During
the quarter ended October 30, 2009, we paid dividends of $0.20 per common
share. During the first quarter of 2010, we also declared an
additional dividend of $0.20 per common share that was paid on November 5,
2009. On December 2, 2009, the Company’s Board of Directors declared
a regular dividend of $0.20 per share payable on February 5, 2010 to
shareholders of record on January 15, 2010.
During
the quarter ended October 30, 2009, we received proceeds of $715 from the
exercise of share-based compensation awards and the corresponding issuance of
88,899 shares of our common stock.
Working
Capital
We had
negative working capital of $45,658 at October 30, 2009 versus negative working
capital of $66,637 at July 31, 2009. The change in working capital
compared with July 31, 2009 reflected higher retail inventories. In
the restaurant industry, substantially all sales are either for cash or
third-party credit card. Like many other restaurant companies, we are
able to, and often do, operate with negative working
capital. Restaurant inventories purchased through our principal food
distributor are on terms of net zero days, while restaurant inventories
purchased locally generally are financed from normal trade
credit. Retail inventories purchased domestically generally are
financed from normal trade credit, while imported retail inventories generally
are purchased through wire transfers. These various trade terms are
aided by rapid turnover of the restaurant inventory. Employees
generally are paid on weekly, bi-weekly or semi-monthly schedules in arrears of
hours worked, and certain expenses such as certain taxes and some benefits are
deferred for longer periods of time.
18
Capital
Expenditures
Capital
expenditures (purchase of property and equipment) were $14,904 for the quarter
ended October 30, 2009 as compared to $22,003 during the same period a year
ago. Capital expenditures for maintenance programs accounted for most
of the expenditures. The decrease in capital expenditures from the
first quarter of 2009 to the first quarter of 2010 is primarily due to a
reduction in the number of new locations acquired and under construction as
compared to the prior year. We estimate that our capital expenditures
for 2010 will be between $70,000 and $75,000. This estimate includes certain
costs related to the acquisition of sites and construction of seven new stores
that have opened or will open during 2010, as well as for acquisition and
construction costs for locations that we expect to open in 2011, capital
expenditures for maintenance programs and operational innovation
initiatives. We intend to fund our capital expenditures with cash
flows from operations and borrowings under our Revolving Credit Facility, as
necessary. Capitalized interest was $80 and $200, respectively, for
the quarters ended October 30, 2009 and October 31, 2008.
Off-Balance
Sheet Arrangements
Other
than various operating leases, we have no material off-balance sheet
arrangements. Refer to the sub-section entitled
“Off-Balance Sheet Arrangements” under the section entitled “Liquidity and
Capital Resources” presented in the MD&A of our 2009 Form 10-K for
additional information regarding our operating leases.
Material
Commitments
Except as
set forth above under "Borrowing Capacity and Debt Covenants," there have been
no material changes in our material commitments other than in the ordinary
course of business since the end of 2009. Refer to the sub-section
entitled “Material Commitments” under the section entitled “Liquidity and
Capital Resources” presented in the MD&A of our 2009 Form 10-K for
additional information regarding our material commitments.
Recent Accounting
Pronouncements
Accounting
Standards Codification
On
September 15, 2009, we adopted the Accounting Standards Codification (“ASC”) as
issued by the Financial Accounting Standards Board (“FASB”). The ASC is the
single source of authoritative nongovernmental accounting principles generally
accepted in the United States of America (“GAAP”), except for rules and
interpretive releases of the SEC, which are sources of authoritative GAAP for
SEC registrants. The adoption did not have an impact on our
consolidated financial statements.
Fair
Value
On August
1, 2009, the first day of 2010, we adopted, on a prospective basis, new
accounting guidance as issued by the FASB for certain nonfinancial assets and
liabilities that are recorded or disclosed at fair value on a nonrecurring
basis, such as nonfinancial long-lived asset groups measured at fair value for
an impairment assessment. The adoption did not have an impact on our
consolidated financial statements.
19
Critical Accounting
Estimates
We
prepare our consolidated financial statements in conformity with
GAAP. The preparation of these financial statements requires us to
make estimates and assumptions about future events and apply judgments that
affect the reported amounts of assets, liabilities, revenue, expenses and
related disclosures. We base our estimates and judgments on
historical experience, current trends, outside advice from parties believed to
be experts in such matters and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. However, because future events
and their effects cannot be determined with certainty, actual results could
differ from those assumptions and estimates, and such differences could be
material.
Our
significant accounting policies are discussed in Note 2 to the Consolidated
Financial Statements contained in the 2009 Form 10-K. Judgments and
uncertainties affecting the application of those policies may result in
materially different amounts being reported under different conditions or using
different assumptions. Critical accounting estimates are those
that:
·
|
management
believes are both most important to the portrayal of our financial
condition and operating results and
|
·
|
require
management's most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain.
|
We
consider the following accounting estimates to be most critical in understanding
the judgments that are involved in preparing our consolidated financial
statements:
·
|
Impairment
of Long-Lived Assets and Provision for Asset
Dispositions
|
·
|
Insurance
Reserves
|
·
|
Inventory
Reserves
|
·
|
Tax
Provision
|
·
|
Share-Based
Compensation
|
·
|
Unredeemed
Gift Cards
|
·
|
Legal
Proceedings
|
Management
has reviewed these critical accounting estimates and related disclosures with
the Audit Committee of our Board of Directors.
Impairment
of Long-Lived Assets and Provision for Asset Dispositions
We assess
the impairment of long-lived assets whenever events or changes in circumstances
indicate that the carrying value may not be
recoverable. Recoverability of assets is measured by comparing the
carrying value of the asset to the undiscounted future cash flows expected to be
generated by the asset. If the total expected future cash flows are
less than the carrying amount of the asset, the carrying amount is written down
to the estimated fair value of an asset to be held and used or the fair value,
net of estimated costs of disposal, of an asset to be disposed of, and a loss
resulting from impairment is recognized by a charge to
income. Judgments and estimates that we make related to the expected
useful lives of long-lived assets are affected by factors such as changes in
economic conditions and changes in operating performance. The
accuracy of such provisions can vary materially from original estimates and
management regularly monitors the adequacy of the provisions until final
disposition occurs.
20
We have
not made any material changes in our methodology for assessing impairments
during the first quarter of 2010 and we do not believe that there will be a
material change in the estimates or assumptions we use to assess impairment on
long-lived assets. However, if actual results are not consistent with
our estimates and assumptions used in estimating future cash flows and fair
values of long-lived assets, we may be exposed to losses that could be
material. We did not record any impairment charges in the first
quarter of 2010.
Insurance
Reserves
We
self-insure a significant portion of our expected workers’ compensation, general
liability and health insurance programs. We purchase insurance for
individual workers’ compensation claims that exceed $250, $500 or $1,000
depending on the state in which the claim originates. We purchase
insurance for individual general liability claims that exceed
$500. We self-insure a portion of our group health
program. Benefits for any individual (employee or dependents) in the
self-insured program are limited to not more than $1,000 lifetime, $100 in any
given plan year and, in certain cases, to not more than $15 in any given plan
year. We record a liability for the self-insured portion of our group
health program for all unpaid claims based upon a loss development analysis
derived from actual group health claims payment experience provided by our third
party administrator.
We record
a liability for workers’ compensation and general liability for all unresolved
claims and for an actuarially determined estimate of incurred but not reported
claims at the anticipated cost to us based upon an actuarially determined
reserve as of the end of our third quarter and adjust it by the actuarially
determined losses and actual claims payments for the subsequent quarters until
the next annual actuarial study of our reserve requirements. Those
reserves and these losses are determined actuarially from a range of possible
outcomes within which no given estimate is more likely than any other
estimate. As such, we record the actuarially determined losses at the
low end of that range and discount them to present value using a risk-free
interest rate based on the actuarially projected timing of
payments. We also monitor actual claims development, including
incurrence or settlement of individual large claims during the interim period
between actuarial studies as another means of estimating the adequacy of our
reserves. From time to time, we perform limited scope interim updates
of our actuarial studies to verify and/or modify our reserves.
Our
accounting policies regarding insurance reserves include certain actuarial
assumptions and management judgments regarding economic conditions, the
frequency and severity of claims and claim development history and settlement
practices. We have not made any material changes in the methodology
used to establish our insurance reserves during the first quarter of 2010 and do
not believe there will be a material change in the estimates or assumptions used
to calculate the insurance reserves. However, changes in these
actuarial assumptions or management judgments in the future may produce
materially different amounts of expense that would be reported under these
insurance programs.
Inventory
Reserves
Cost of
goods sold includes the cost of retail merchandise sold at our stores utilizing
the retail inventory accounting method. Inventory valuation
provisions are included for retail inventory obsolescence and retail inventory
shrinkage. Retail inventory is reviewed on a quarterly basis for
obsolescence and adjusted as appropriate based on assumptions made by management
and judgment regarding inventory aging and future promotional
activities. Cost of goods sold includes an estimate of shrinkage that
is adjusted upon physical inventory counts in subsequent
periods. Physical inventory counts are conducted throughout the third
and fourth quarters of the fiscal year based upon a cyclical inventory
schedule. An estimate of shrinkage is recorded for the time period
between physical inventory counts by using a three-year average of the physical
inventories’ results on a store-by-store basis. We
have not made any material changes in the methodology used to estimate shrinkage
during the first quarter of 2010 and do not believe that there will be a
material change in the future estimates or assumptions used to calculate
shrinkage. However, actual shrinkage recorded may produce materially
different amounts of shrinkage than we have estimated.
21
Tax
Provision
We must
make estimates of certain items that comprise our income tax
provision. These estimates include effective state and local income
tax rates, employer tax credits for items such as FICA taxes paid on employee
tip income, Work Opportunity and Welfare to Work credits, as well as estimates
related to certain depreciation and capitalization policies.
We
recognize (or derecognize) a tax position taken or expected to be taken in a tax
return in the financial statements when it is more likely than not (i.e., a
likelihood of more than fifty percent) that the position would be sustained (or
not sustained) upon examination by tax authorities. A recognized tax
position is then measured at the largest amount of benefit that is greater than
fifty percent likely of being realized upon ultimate settlement.
Our
estimates are made based on current tax laws, the best available information at
the time of the provision and historical experience. We file our
income tax returns many months after our year end. These returns are
subject to audit by the federal and various state governments years after the
returns are filed and could be subject to differing interpretations of the tax
laws. We then must assess the likelihood of successful legal
proceedings or reach a settlement with the relevant taxing
authority. Although we believe that the judgments and estimates used
in establishing our tax provision are reasonable, a successful legal proceeding
or settlement could result in material adjustments to our consolidated financial
statements and our consolidated financial position (see Note 15 to our
Consolidated Financial Statements contained in the 2009 Form 10-K for additional
information).
Share-Based
Compensation
Share-based
compensation cost is measured at the grant date based on the fair value of the
award and is recognized as expense over the requisite service
period. Our policy is to recognize compensation cost for awards with
only service conditions and a graded vesting schedule on a straight-line basis
over the requisite service period for the entire award. Additionally,
our policy is to issue new shares of common stock to satisfy exercises of
share-based compensation awards.
The fair
value of each option award granted was estimated on the date of grant using a
binomial lattice-based option valuation model. This model
incorporates the following ranges of assumptions:
·
|
The
expected volatility is a blend of implied volatility based on
market-traded options on our stock and historical volatility of our stock
over the contractual life of the
options.
|
·
|
We
use historical data to estimate option exercise and employee termination
behavior within the valuation model; separate groups of employees that
have similar historical exercise behavior are considered separately for
valuation purposes. The expected life of options granted is
derived from the output of the option valuation model and represents the
period of time the options are expected to be
outstanding.
|
·
|
The
risk-free interest rate is based on the U.S. Treasury yield curve in
effect at the time of grant for periods within the contractual life of the
option.
|
·
|
The
expected dividend yield is based on our current dividend yield as the best
estimate of projected dividend yield for periods within the contractual
life of the option.
|
The
expected volatility, option exercise and termination assumptions involve
management’s best estimates at that time, all of which affect the fair value of
the option calculated by the binomial lattice-based option valuation model and,
ultimately, the expense that will be recognized over the life of the
option. We update the historical and implied components of the expected
volatility assumption when new grants are made. We update option exercise
and termination assumptions annually. The expected life is a
by-product of the lattice model and is updated when new grants are
made.
22
Compensation
expense is recognized for only the portion of awards that are expected to
vest. Therefore, an estimated forfeiture rate derived from historical
employee termination behavior, grouped by job classification, is applied against
share-based compensation expense. The forfeiture rate is applied on a
straight-line basis over the service (vesting) period for each separately
vesting portion of the award as if the award were, in substance, multiple
awards. We update the estimated forfeiture rate to actual on each of
the vesting dates and adjust compensation expense accordingly so that the amount
of compensation cost recognized at any date is at least equal to the portion of
the grant-date value of the award that is vested at that date.
Generally,
the fair value of each nonvested stock grant is equal to the market price of our
stock at the date of grant reduced by the present value of expected dividends to
be paid prior to the vesting period, discounted using an appropriate risk-free
interest rate.
All of
our nonvested stock grants are time vested except the nonvested stock grants of
one executive that are based upon the achievement of strategic
goals. Compensation cost for performance-based awards is recognized
when it is probable that the performance criteria will be met. At
each reporting period, we reassess the probability of achieving the performance
targets and the performance period required to meet those targets. Determining
whether the performance targets will be achieved involves judgment and the
estimate of expense may be revised periodically based on the probability of
achieving the performance targets. Revisions are reflected in the
period in which the estimate is changed. If any performance goals are
not met, no compensation cost is ultimately recognized and, to the extent
previously recognized, compensation cost is reversed.
We have
not made any material changes in our estimates or assumptions used to determine
share-based compensation expense during the first quarter of 2010. We
do not believe that there will be a material change in the future estimates or
assumptions used to determine share-based compensation
expense. However, if actual results are not consistent with our
estimates or assumptions, we may be exposed to changes in share-based
compensation expense that could be material.
Unredeemed
Gift Cards
|
Unredeemed
gift cards represent a liability related to unearned income and are recorded at
their expected redemption value. No revenue is recognized in
connection with the point-of-sale transaction when gift cards are
sold. For those states that exempt gift cards from their escheat
laws, we make estimates of the ultimate unredeemed (“breakage”) gift cards in
the period of the original sale and amortize this breakage over the redemption
period that other gift cards historically have been redeemed by reducing the
liability and recording revenue accordingly. For those states that do
not exempt gift cards from their escheat laws, we record breakage in the period
that gift cards are remitted to the state and reduce our liability
accordingly. Any amounts remitted to states under escheat laws reduce
our deferred revenue liability and have no effect on revenue or expense while
any amounts that we are permitted to retain by state escheat laws for
administrative costs are recorded as revenue. Changes in redemption
behavior or management's judgments regarding redemption trends in the future may
produce materially different amounts of deferred revenue to be
reported.
We have
not made any material changes in the methodology used to record the deferred
revenue liability for unredeemed gift cards during the first quarter of 2010 and
do not believe there will be material changes in the future estimates or
assumptions used to record this liability. However, if actual results
are not consistent with our estimates or assumptions, we may be exposed to
losses or gains that could be material.
Legal
Proceedings
We are
parties to various legal and regulatory proceedings and claims incidental to our
business. In the opinion of management, however, based upon
information currently available, the ultimate liability with respect to these
actions will not materially affect our consolidated results of operations or
financial position.
23
We review outstanding claims and proceedings internally and with external counsel as necessary to assess probability of loss and for the ability to estimate loss. These assessments are re-evaluated each quarter or as new information becomes available to determine whether a reserve should be established or if any existing reserve should be adjusted. The actual cost of resolving a claim or proceeding ultimately may be substantially different than the amount of the recorded reserve. In addition, because it is not permissible under GAAP to establish a litigation reserve until the loss is both probable and estimable, in some cases there may be insufficient time to establish a reserve prior to the actual incurrence of the loss (upon verdict and judgment at trial, for example, or in the case of a quickly negotiated settlement). |
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
Part II,
Item 7A of the 2009 Form 10-K is incorporated in this item of this Quarterly
Report on Form 10-Q by this reference. There have been no material
changes in our quantitative and qualitative market risks since July 31,
2009.
Item
4. Controls and Procedures
Our
management, with the participation of our principal executive and financial
officers, including the Chief Executive Officer and the Chief Financial Officer,
evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934
(the “Exchange Act”)). Based upon this evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that as of October
30, 2009, our disclosure controls and procedures were effective for the purposes
set forth in the definition thereof in Exchange Act Rule 13a-15(e).
There
have been no changes (including corrective actions with regard to significant
deficiencies and material weaknesses) during the quarter ended October 30, 2009
in our internal control over financial reporting (as defined in Exchange Act
Rule 13a-15(f)) that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
24
PART
II – OTHER INFORMATION
Item
1A.
|
Risk Factors
|
There
have been no material changes in the risk factors previously disclosed in
“Item 1A. Risk Factors” of our 2009 Form 10-K.
|
|
Item
4.
|
Submission of Matters
to a Vote of Security
Holders
|
|
(a)
|
Although
no items were submitted to a vote of security holders during the quarter
ended October 30, 2009, the annual meeting of shareholders (the “Annual
Meeting”) was held on December 2,
2009.
|
|
(b)
|
Proxies
for the Annual Meeting were solicited in accordance with Regulation 14 of
the Exchange Act; there was no solicitation in opposition to management’s
nominees and all of management’s nominees were elected. Each
director is elected to serve for a 1-year term and until his or her
successor is elected and qualified.
|
(c) The
following sets forth the results of voting on each matter at the Annual
Meeting:
Proposal
1 – Election of Directors.
WITHHOLD | |||
FOR | AUTHORITY | ||
Robert
V. Dale
|
19,312,269
|
951,066
|
|
Richard
J. Dobkin
|
19,365,632
|
897,703
|
|
Robert
C. Hilton
|
19,378,632
|
884,703
|
|
Charles
E. Jones, Jr.
|
14,929,341
|
5,333,994
|
|
B.
F. “Jack” Lowery
|
17,033,094
|
3,230,241
|
|
Martha
M. Mitchell
|
19,418,419
|
844,916
|
|
Andrea
M. Weiss
|
19,329,424
|
933,911
|
|
Jimmie
D. White
|
19,421,014
|
842,321
|
|
Michael
A. Woodhouse
|
19,028,001
|
1,235,334
|
|
Proposal
2 - To approve the selection of Deloitte & Touche LLP as the Company’s
independent
registered public accounting firm for fiscal year 2010.
Votes
cast for
|
19,743,235
|
Votes
cast against
|
490,020
|
Votes
cast to abstain
|
30,078
|
Proposal
3 - To approve the proposed amendment to the Company’s 2002 Omnibus Incentive
Compensation Plan to change the equity compensation for non-management directors
from a fixed number of shares to a targeted value.
Votes
cast for
|
8,067,221
|
Votes
cast against
|
7,957,713
|
Votes
cast to abstain
|
52,448
|
25
Item
6.
|
Exhibits
|
See
Exhibit Index immediately following the signature page
hereto.
|
26
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
CRACKER
BARREL OLD COUNTRY STORE, INC.
|
|||
Date:
12/8/09
|
By:
|
/s/Sandra B. Cochran |
|
Sandra
B. Cochran, Executive Vice President and
|
|||
Chief
Financial Officer
|
|||
Date:
12/8/09
|
By:
|
/s/Patrick A. Scruggs |
|
Patrick
A. Scruggs, Vice President, Accounting and Tax
|
|||
and
Chief Accounting Officer
|
27
EXHIBIT
INDEX
Exhibit No.
|
Description
|
3.1
|
Bylaws
of Cracker Barrel Old Country Store, Inc. (as amended and restated
effective September 10, 2009) (incorporated by reference to Exhibit 3.1 to
the Company’s Current Report on Form 8-K dated September 10, 2009 and
filed with the Commission on September 16, 2009)
|
10.1
|
Second
Amendment to Credit Facility (incorporated by reference to Exhibit 99.1 to
the Company’s Current Report on Form 8-K dated November 6, 2009 and filed
with the Commission on November 10, 2009)
|
10.2
|
2010
Annual Bonus Plan (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K dated September 10, 2009 and filed
with the Commission on September 16, 2009)
|
10.3
|
2010
Long-Term Incentive Plan
|
31
|
Rule
13a-14(a)/15d-14(a) Certifications
|
32
|
Section
1350 Certifications
|
28